Bond Rout and the Power of Compound Interest

The bond market has been pulverized in the past few weeks and for those who have anything beyond short maturities (5 years or so) are probably facing some substantial declines in the principal.

For example,

BOND ROUT – Our nation’s 2% coupon 10-year Treasury note with a par value of $1,000 was trading for $1,093 as of the close of trading on Monday 11/07/16 (i.e., the day before the presidential election), resulting in a current yield of 1.83%. The same 2% coupon 10-year Treasury note with a par value of $1,000 was trading for $811 as of the close of trading last Friday 12/09/16, resulting in a current yield of 2.47%. Thus, the value of the 10-year Treasury note has fallen 26% in the last 5 weeks since the early November election (source: BTN Research).

Also, for those who like to suggest real estate is ALWAYS a better investment relative to equities, I give you one of the best markets of all time (San Francisco, CA) versus the stock market. I know firsthand the reality of owning property in the Bay area as I once lived there and it was the second time I had to purchase a home. These stats are heartwarming to those who like the ease and simplicity of owning publicly traded businesses versus the headaches that sometimes come with owning real property.

THE MAGIC OF COMPOUND INTEREST – A San Francisco home on the market today for $6.95 million was originally purchased by the current owner’s grandfather for $30,000 in 1926. The $6.95 million list price reflects a +6.2% annual growth rate for the last 90 years. If the home had grown by +10% per year for 90 years, the current list price would be $159 million or 23 times the $6.95 million price tag (source: BTN Research).